Question

Equipment costing $123,000 has accumulated depreciation of $95,000. The equipment is a trade-in for new equipment costing $188,000. If the trade-in value received for the old equipment is $34,000, the journal entry to record this transaction is to:

A. debit Equipment (New) for $188,000, and credit Cash for $188,000.

B. debit Equipment (New) for $188,000, debit Accumulated Depreciation - Equipment for $95,000, credit Equipment (Old) for $123,000, credit Cash for $154,000, and credit Gain on Exchange of Assets for $6,000.

C. debit Equipment (New) for $188,000, debit Accumulated Depreciation - Equipment for $95,000, credit Equipment (Old) for $123,000 and credit Cash for $160,000.

D. debit Equipment (New) for $188,000, debit Accumulated Depreciation - Equipment for $95,000, debit Loss on Exchange of Assets for $28,000, credit Equipment (Old) for $123,000 and credit Cash for $188,000.

Answer 1

The correct journal entry for the equipment trade-in records the cost of the new equipment, removes the old equipment and its accumulated depreciation, includes cash paid, and captures a gain since the trade-in value exceeded the book value of the old equipment. The entry involves debits to new equipment and accumulated depreciation, and credits to old equipment, cash, and gain on exchange of assets.

Step-by-step explanation:

The correct journal entry to record the trade-in of old equipment for new equipment involves removing the cost and accumulated depreciation of the old equipment, recording the new equipment at its cost, recording cash paid, and recording any gain or loss on the exchange.

To find the gain or loss on trade-in, we need to determine the book value of the old equipment by subtracting its accumulated depreciation from the cost. In this case:

Book value of old equipment = Cost of old equipment – Accumulated Depreciation
Book value of old equipment = $123,000 – $95,000 = $28,000

Since the trade-in value received for the old equipment is $34,000, which is greater than the book value of $28,000, we have a gain of $6,000 ($34,000 - $28,000).

The correct journal entry to record this transaction is therefore:

• Debit Equipment (New) for $188,000
• Debit Accumulated Depreciation - Equipment for $95,000
• Credit Equipment (Old) for $123,000
• Credit Cash for $154,000 (the difference between the cost of new equipment and trade-in value received)
• Credit Gain on Exchange of Assets for $6,000

This aligns with option B as listed in the student's potential answers.